The long path to enhanced investor protection

Among other things, this includes requirements for firms to: set out the product and service costs investors can expect at account opening; disclose transaction costs, and any deferred costs, when a trade takes place; and to provide annual reports revealing, in dollar terms, what investors were charged, including any fees paid to the firm, such as trailing commissions and commissions on bond trades.

It also requires firms to provide investors with a new annual investment performance report that includes: position cost and market value; deposits and withdrawals during the year and since account opening; and percentage returns over one-, three-, five- and 10-year periods, and since inception; along with certain enhancements to account statements.

The new requirements are scheduled to take effect on July 15. However, there are transition periods for various aspects of the amendments, ranging from one year for the simplest changes, all the way to three years for some of the bigger ones, such as the new annual reports to clients.

By the time it’s fully implemented, the CRM will have been under construction for more than 15 years. And yet, despite the time it has taken to make these changes, it doesn’t represent a revolution in retail investment regulation. Rather, it’s an effort to build on the existing regime to make it more effective for investors.

And contrary to the name, the client relationship model isn’t a unitary set of rules either — the securities commissions, and the self-regulatory organizations, each have their own versions of CRM rules, which are substantially similar, but not identical.

Now that the CSA’s CRM 2 proposals have been finalized, the self-regulatory organizations (the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA)) will have to introduce their own rule amendments to conform with the CSA’s requirements.

The first phase of CRM reforms followed a similar approach — the CSA set down its requirements, and then the SROs introduced their own version of rules, customized to their individual industry segments. The initial round of reforms established certain “relationship disclosure” requirements, and set standards for disclosing conflicts of interest, among other things.

The CSA passed its initial set of reforms in these areas in 2009. The MFDA’s reforms were approved in 2010, and IIROC only just finalized its version of these reforms in 2012. To understand this hodge-podge approach, it’s important to remember how the CRM came around in the first place.

The client relationship model has its roots in an initiative that began at the Ontario Securities Commission (OSC) back in 2000. At the time, the initiative was known as the Fair Dealing Model (FDM). The FDM attempted to rethink the regulation of the retail investment business from first principles, and to address some of the regulatory concerns and market failures that were first identified by then-OSC commissioner, Glorianne Stromberg, in her seminal 1995 report on the mutual fund industry.

But the FDM itself never really went anywhere. It faced a variety of obstacles, not least of which was the fact that it was an OSC solo initiative — and, if Ontario adopted it alone, this would have created a completely different approach to regulation compared with the rest of the country, undermining previous harmonization efforts. There was also resistance to the name from those who thought it implied that the retail investment business as it stands is not fair.

So, in order to win some acceptance from both the regulators in other provinces, and the industry, the FDM was dropped. Instead, the CSA pledged to take forward some of its ideas for enhanced disclosure, better client reporting, and greater attention to possible conflicts of interest, into its existing plans for registration reform; and to have the SROs incorporate these ideas into their rules too. This is how the CRM was born. And, to this day, that work continues.

This is the first article in a three-part series on the Client Relationship Model. On Wednesday: CRM implementation challenges.